Medical office projects spur development in Spokane

Health-care-related real estate activity has been brisk here as doctors' groups and commercial real estate developers continue to pursue medical office building projects. Experts say they anticipate more growth in that real estate niche as Spokane strengthens its reputation as a regional medical center.

Doctors are developing their own medical offices partly to provide a source of income to offset declining Medicare reimbursements and because they want an investment after retirement. They also need larger, more specialized spaces as technological advancements allow them to perform more procedures in their offices rather than in a hospital. Meanwhile, developers see medical office buildings as a gold mine in a sector that's largely immune to economic fluctuations, even though the cost of construction is higher because of the specialized nature of such offices.

"The bottom line is that since Spokane is a medical center for the entire region, we're going to see continued growth in medical office buildings, especially by subspecialties that have more and more interest in ownership," says Randall Stamper, a Spokane attorney who specializes in health-care law. "There are local contractors who act as developers that are actively pursuing that opportunity as well."

NAI Black, a longtime Spokane-based commercial real estate and management firm, says it views medical office developments as its biggest growth opportunity. In February, the company landed a con-tract with Empire Health Services to man-age and lease its medical office proper-ties, which has "given us a lot of foothold in that market;" says CEO Dave Black.

Black also is part owner in Latah Creek Plaza LLC, which plans to develop a 20,000-square-foot medical office building just north of the Latah Creek Plaza shopping center in southeast Spokane.

"The fact is that the medical community is growing and very strong and always has been;' Black says. "You always do regular office space, retail, industrial, and investment, but the medical office building cannot be ignored" as an increasingly important component of commercial real estate, he says.

The medical office projects developed or announced this year include:

*Spokane Eye Clinic PS plans to erect a $9.6 million, 44,000-square-foot building erected just north of its current facility in the medical district south of downtown.

*Rockwood Clinic signed a long-term lease for a 12,000-square-foot office building being constructed at the Quail Run Professional Campus, on the South Hill, by Dr. John Sonneland, who's developing the office center.

*Group Health Cooperative plans to move its South Hill clinic in February to a space in the new Regal Place professional building constructed by Spokane developer Terry Tombari.

*North Spokane Family Dentistry recently started work on a new medical-office building on the North Side to replace its former, smaller quarters.

*In August, Northwest Dermatology said it planned to develop a new medical office building north of Spokane because it had outgrown its current leased space.

Developers are attracted to medical office buildings partly because the health-care industry tends to be a stable part of the economy, especially in Spokane, where health care is such a dominant sector, Black says. As of the end of last year, the Spokane-area medical-office market had a vacancy rate of roughly 9 percent - compared with a vacancy rate of 17 percent in the Class A office space market, Black says.

Tenant turnover rates typically are lower in medical office buildings because doctors want to stay put once they've found a space that meets their needs, and that tendency is attractive to developers, Black says. Also, doctors are busy enough managing their practices that they often look to developers and building managers to manage and lease out their properties.

Medical office buildings pose unique challenges to developers, however, because they require more specialized features than other buildings and must match a tenant's precise specifications, he says. As a result, such developments have become a niche segment in the real estate industry, he says.

"It's an emerging area of expertise, no question," Black says.

Given the considerable cost of construction, rental rates for medical office space are higher than for other office uses, which also is attractive to developers, he says. The average rental rate for medical office space here is $20 per square foot, compared with the $13 to $17 average rate for Class A space, he says.

Investment

Rod Emerson, administrator at Spokane Ear, Nose & Throat Clinic PS, says that physicians' groups are looking into developing their own buildings, rather than leasing from a hospital or developer, because they want to determine their building's size and configuration and want to be able to set their own lease rates. Earlier this year, Spokane ENT built a satellite facility on the North Side to replace its leased space near Holy Family Hospital.

"It becomes an investment, an asset for you," Emerson says. "There's also more overall growth and demand on specialties; we're having a hard time providing enough access to patients."

Space in Spokane ENT's new building, at 9922 N. Nevada, is filling up rapidly, he says. The physicians' group, which includes 13 doctors and one physician's assistant at two locations, plans to hire two more doctors this summer, and is looking at developing a third location in the next few years, Emerson says.

When doctors search.for a site for a medical office, they look for a convenient location for their patients, Stamper says. If they perform procedures primarily in a hospital setting, they need to be close to a hospital campus, but if they don't they can be more flexible, he says.

Since doctors these days are performing more office-based procedures and offering in-house diagnostic imaging services, they need more space for their offices. Because Spokane is a medical research center, many doctors are involved in clinical trials and need additional space for research. Also, patients expect doctor's offices to have a clean, modern look. Because of those preferences, as well as the doctors' needs for plenty of space, it often makes more sense to build a new structure than to remodel a space, Stamper says.

Event though more doctors and developers are interested in constructing medical office buildings, rising construction costs sometimes have put a damper on their plans, Stamper says. Interest rates remain pretty attractive, however, so some physicians' groups are deciding to go ahead with projects anyway, he says.

Although owning their buildings can provide doctors with additional income after they retire, it also can cause headaches when they're making long-term ownership decisions, Stamper says. Physicians' groups must decide when to let younger doctors in a practice buy into the building. They also must determine whether to sell the building at some point to the younger members of the practice or sell it to a developer who would lease out the building to the practice, he says.

Zoning

Spokane businessman Mark Wrenn says he originally decided to develop a medical office building on the South Hill for purely practical reasons. The land he bought along Grand Boulevard just east of Manito Park was zoned R3, which meant he could only build a multifamily residential structure or a medical office complex.

"I wanted something that would provide a nice, stable long-term income that also would fit in with the neighborhood," says Wrenn, who developed the project through a company called Jamesee LLC. "It's more expensive on the build-out, but a better option in the long run."

Exterior work on the development, which consists of two medical office buildings, is nearly completed, and Wrenn says he is negotiating with a number of potential tenants that are interested in leasing space in the structure.


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